Salesforce, Inc. — Form 10-Q Summary
Period note: The request identifies “2020 Q1,” but the filing covers the three months ended April 30, 2021, Salesforce’s first quarter of fiscal 2022. Comparative figures are for the three months ended April 30, 2020. Dollar amounts are in U.S. dollars.
Business context and reporting period
Salesforce provides cloud-based customer relationship management technology through its Customer 360 platform. Subscription and support generated 93% of quarterly revenue. The unaudited interim statements are prepared under U.S. GAAP; the company cautions that quarterly results are not necessarily indicative of the full fiscal year.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 | Change / context |
|---|---|---|---|
| Revenue | $5.963 billion | $4.865 billion | Up 23% |
| Subscription and support revenue | $5.536 billion | $4.575 billion | Up 21% |
| Professional services and other revenue | $427 million | $290 million | Up 47% |
| Gross profit / margin | $4.408 billion / 74% | $3.611 billion / 74% | Margin unchanged |
| Operating income (loss) / margin | $354 million / 6% | $(140) million / (3)% | Returned to operating profit |
| Net income | $469 million | $99 million | Includes $288 million of net strategic investment gains |
| Diluted EPS | $0.50 | $0.11 | Up from prior-year quarter |
| Cash from operations | $3.228 billion | $1.859 billion | Up 74% |
| Cash, cash equivalents and marketable securities | $15.023 billion | $11.966 billion at Jan. 31, 2021 | Balance-sheet date comparison |
| Debt principal outstanding | $2.689 billion | $2.690 billion at Jan. 31, 2021 | No Credit Facility borrowings |
| Remaining performance obligation (RPO) | $35.0 billion | $36.1 billion at Jan. 31, 2021 | Company reports 19% year-over-year growth; current RPO $17.8 billion, up 23% year-over-year |
Operating expenses were $4.054 billion, or 68% of revenue, versus $3.751 billion, or 77%, a year earlier. The effective tax rate was 22%, compared with a tax benefit and negative 111% effective rate in the prior-year quarter. Accounts receivable declined to $3.174 billion from $7.786 billion at January 31, 2021; the quarter’s cash flow benefited from a $4.616 billion accounts-receivable change and was partly offset by a $1.451 billion decrease in unearned revenue.
Material changes and unusual items
- Revenue growth was primarily volume-driven, including new customers, upgrades, additional subscriptions and acquisition activity; management said pricing was not a significant driver. Foreign currency movements benefited revenue by approximately 3%.
- Operating expenses increased in dollars, including higher employee-related costs, sales hiring, commission amortization and investment in service delivery and data-center capacity. Marketing and sales expense in the prior-year quarter included a one-time partial minimum sales-commission guarantee.
- Net strategic investment gains were $288 million, versus $192 million. Q1 FY2022 included a $498 million net unrealized gain on privately held equity securities, including an approximately $369 million mark-up of one investment, partly offset by $206 million of unrealized losses on publicly traded investments.
- Cash from operations was also affected by seasonal collections and billing patterns. The company says its first fiscal quarter is typically its largest collections and operating-cash-flow quarter.
- The February 2021 Acumen Solutions acquisition involved approximately $433 million of cash consideration; its results were not material to the quarter.
Outlook, risks and contingencies
The filing does not provide specific quarterly or full-year revenue or EPS guidance. Management expects continued investment in growth, product development, sales capacity and data-center infrastructure; it expects research and development and marketing and sales expense to rise in absolute dollars, and marketing and sales expense to increase as a percentage of revenue. Management expects attrition to remain consistent or slightly improve for the rest of fiscal 2022, while noting it could rise, including due to COVID-19.
The proposed Slack acquisition was expected to close late in the second quarter of fiscal 2022, subject to closing conditions and regulatory review. Based on Slack shares outstanding at April 30, 2021, the consideration was estimated at $15.7 billion in cash plus 45 million Salesforce shares. Salesforce expected to fund the cash component with balance-sheet cash and new debt; committed financing included a $4.0 billion bridge facility and a $3.0 billion term loan, neither drawn as of quarter-end. The filing also identifies integration, financing, regulatory approval and potential dilution risks.
Other risks highlighted include the ongoing COVID-19 pandemic and its uncertain effects on customers, employees and operations; cybersecurity, service availability and third-party infrastructure; foreign-exchange and investment-value volatility; privacy and regulatory requirements; competition and customer renewals; and legal proceedings. Management said it could not reasonably estimate possible losses beyond accrued amounts for legal contingencies. The Tableau securities class action had a settlement agreement in principle and preliminary approval; a related derivative matter was dismissed with prejudice, with a motion for reconsideration pending. The company reported compliance with debt covenants and effective disclosure controls.
Contractual commitments include approximately $3.9 billion of future non-cancelable minimum payments and $1.4 billion of operating leases not yet commenced. These commitments are in addition to debt and the prospective Slack financing. The filing also notes a possible, uncertain one-time Israeli tax charge if certain acquired Israeli operations and assets are integrated.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied filing is Q1 FY2022, not 2020 Q1.
- Assess how much of reported earnings reflects recurring operations versus volatile strategic-investment gains and losses.
- Review the sustainability of operating cash flow, given seasonal collections, the large accounts-receivable movement and lower unearned revenue.
- Track Slack closing, financing, share issuance, integration costs and resulting debt and dilution.
- Monitor RPO and current RPO trends, customer attrition, COVID-19 impacts, and planned increases in operating investment.
- Review investment concentration and valuation risk, legal contingencies, lease commitments and potential tax exposures.